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Weighted Average Cost of Capital. The ¡§Hurdle Rate¡¨ or the ¡§Discount
Rate¡¨ represented by the ¡§Weighted Average Cost ...
Weighted Average Cost of Capital. Weighted Average Cost of Capital Both Lester
and Shang-wa have used different financial strategies ...
... status. In order for the equity component to be low, the weighted average
cost of capital would have to be low as well. Because ...
... 3. What is the weighted average cost of capital for Marriott Corporation? a. What
risk free rate and risk premium did you use to calculate the cost of equity? ...
... performance. Marriott use the Weighted-Average-Cost-of Capital (WACC) method
to measure the opportunity cost for investments. WACC ...
Submitted by mobinil1 on December 27, 2006
Category: Business
Words: 1428 | Pages: 6
Views: 647
Popularity Rank: 12,559
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The ¡§Hurdle Rate¡¨ or the ¡§Discount Rate¡¨ represented by the ¡§Weighted Average Cost of Capital¡¨ (WACC) plays an important role in deciding the Net Present Value (NPV) of a project. Calculating the NPV is an important task since it allows the decision maker to make sound investment decisions; if the NPV of a project is positive, then the project is profitable and should be taken, but if the project has a negative NPV, then the project should not be considered. When evaluating a project, the decision maker is making an investment decision with the goal of maximizing shareholders¡¦ wealth. But the investment money does not come from one source, or to put it in another way, the financial manager might have money to invest, but this money could be available from sale of stock, sale of bonds, suppliers¡¦ accounts payable, the firm¡¦s retained earnings, as well as bank loans. Each of such sources has its own cost, and this cost is the return required by each stakeholder. Since the aim is maximizing the general worth of the firm, the financial manager should base his analysis on the weighted average of all such costs.
To sum up, the firm¡¦s overall cost of capital will reflect the required return on the firm¡¦s assets as a whole. Given that the firm uses debt and equity capital, the overall cost of capital will be a mixture of the returns needed to compensate its creditors and its stockholders. In other words, a firm¡¦s cost of capital will reflect both its cost of debt capital and its cost of equity capital.
First: The Cost of Equity:
This is the hardest type of cost to calculate; the reason behind that is the fact that there is no way of directly observing the return that the firm¡¦s equity investors required on their investment. Instead such a return must be estimated. There are two approaches to determining the cost of equity: the Dividend Growth Model Approach and the Security Market Line...
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